Wasn’t Amazon Supposed to Kill the Mall?

Simon Property is saying 'not so fast!'

It seems the death of the great American shopping mall has been greatly exaggerated — at least if Simon Property Group’s (NYSE:SPG) profits and share-price performance are any kind of guide.

At the height of the financial crisis and Great Recession, the U.S. retail landscape was littered with dead and disused shopping malls. The epic economic meltdown was supposed to be a fatal blow for mall operators after more than a decade of assaults — first from traffic-sapping big-box retailers like Walmart (NYSE:WMT), Target (NYSE:TGT) and Kohl’s (NYSE:KSS), and later by the online juggernaut known as Amazon.com (NASDAQ:AMZN).

But as much as mall anchor-stores like Sears (NASDAQ:SHLD) and JCPenney (NYSE:JCP) might be suffering from the big-box and online onslaught, the malls themselves — at least Simon Property’s malls — have risen from the ashes and, indeed, thrived.

Simon Property is the nation’s largest operator of shopping malls, with outright ownership or interest in 328 properties, ranging from North America to Asia to Europe. It’s also a real estate investment trust (REIT) — meaning it must pay out most of its earnings as dividends — and is the only real estate company in the S&P 500.

As such, you’d think Simon Property might be a good proxy for the state of malls in America, but given what’s driving its operating and stock performance, that might not be entirely apt.

Simon Property on Monday said fourth-quarter results easily topped Wall Street estimates, helped by greater shopper spending and higher average retailer rents. Indeed, Simon Property has been riding a tepid economic recovery like perhaps no other mall operator, thanks to what essentially comes down to a two-pronged approach.

Simon Property operates many of the nation’s most popular, more upscale malls, which remain attractive to consumers lucky enough to have disposable income, as well as retail chains looking to expand.

But more important, at the same time, Simon Property has also been rapidly growing its portfolio of outlet mall locations, both domestically and abroad. Luxury items and brand names at bargain prices are appealing in good times and bad.

That has helped shares in Simon Property rise about 480% since bottoming out with the rest of the market in early March 2009. Add in this REIT’s dividends, and SPG generated a total return of more than 550% during that period. By comparison, the S&P 500 generated a total return — or price gains plus dividends — of 140% in that time.

And what about Amazon? Wasn’t it supposed to put brick-and-mortar retail out of business by now?

Well, as fast as Amazon and online retail is growing — and taking share from old-line retailers and their landlords — malls and other physical retail locations still book the vast majority of all retail dollars spent in the U.S.

Although online sales are growing at a torrid pace, they still represent just a small faction of total retail sales. For example, online retail sales grew 12% to $226 billion last year, according to data from technology and research firm Forrester Research, but those Internet-based sales still represented only about 7% of total retail spending.

True, Forrester expects whopping growth in online retail sales, forecasting them to top $327 billion by 2016. But even then, those Internet-based purchases will still account for less than 10% of all retail sales.

Malls might be challenged, but Simon Property shows that more upscale, well-appointed shopping centers remain popular with consumers and retail chains alike. Meanwhile, outlet malls — with their irresistible value proposition — have proven to be a brilliant play on the early cyclical rebound in discretionary consumer spending.

In the long run, it’s the lower- and mid-tier malls that have the most to fear from the rise of Amazon — and the next recession in consumer spending.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.